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Tuesday, September 05, 2006

Sun’s Sucker Rally


Shares in Sun Microsystems have risen from under $4 in mid-July to $5 in the last few days. Morningstar recently pointed out that sales of Sun’s mid-range servers drove improved numbers last quarter, but that revenue from other products was not growing. The stock and mutual fund research firm also noted that competition from IBM, Dell, and HP was only likely to get worse.

The underlying reason that Sun’s rally is not justified may be more troubling. Although research firm IDC puts Sun in the third position world wide for server computers, the rise in the power from chips built by AMD and Intel may make the number of servers necessary to be run any function actually drop.

IDC also reported that Sun is now No. 5 in data storage in the second quarter, behind the likes of HP, EMC and IBM. While Sun’s revenue in the industry rose, it was also up sharply at HP and Hitachi.

In Sun’s won SEC filings, the company shows proforma figures that indicate the its revenue would not have grown in the last quarter without the acquisition of StorageTek and SeeBeyond. Shareholders did get a worse balance sheet, but core growth at Sun is not offsetting that.

Sun may have cut costs by eliminating thousands of jobs. The company also may have introduced flashy new products like it Niagara servers. Short of showing growth that is not based on acquisitions, investors are going to remain unimpressed.

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

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